Studying China’s Economic Statecraft

by Dr. James Reilly
CSC academic group:International Relations

James is a Senior Lecturer in Northeast Asian Politics in the Department of Government and International Relations at the University of Sydney. His research and teaching are in the areas of Chinese foreign policy, East Asian politics, and international relations. He is the author of Strong Society, Smart State: The Rise of Public Opinion in China’s Japan Policy (Columbia University Press, 2012), and the co-editor of Australia and China at 40 (UNSW Press, 2012).

Studying China’s Economic Statecraft 1

I was waiting in Mo Han, a small village in southern Yunnan province, to cross over from China into Laos when I noticed a “Most Wanted” signboard featuring the pictures, names and descriptions of Chinese criminals presumed to have escaped into Laos. I began skimming the descriptions of their crimes when a Sichuanese trader standing next to me shoved out his finger: “Hey, I know that guy! We used to work together.” The rest of his group just laughed, and headed across the border.

The poignant example of the Chinese government struggling to track down local border traders engaged in illicit activities, and the networks within which those traders are embedded, points to a potent question for China’s foreign policy: can Beijing rely upon domestic economic actors to advance its interests overseas?

quote With direct control over much of the world’s second-largest economy, the Chinese Communist Party should be able to deploy China’s vast wealth to influence its smaller Asian neighbors. Yet Beijing is often unable to influence key policy decisions in even the poorest countries on its periphery. Why?

Unreliable Agents Abroad

Economic statecraft is when state actors use economic resources such as foreign aid, investment, and trade policies to advance their foreign policy goals. Traditionally, most studies of economic statecraft focused upon the relative strategic and economic dependence of the target country. Faced with the persistent puzzle of dominant states unable to compel the compliance of weaker states, some scholars have begun to examine domestic political conditions in targeted rogue regimes. However, domestic politics in donor states have received less attention. Most scholarship assumes, for instance, that a unitary state enjoys transparent and effective regulatory authority over the commercial agents responsible for implementing economic statecraft. This may be a reasonable assumption when studying ‘the West;’ however, states with ineffective governance, poor information flows, and unclear regulatory authority often have far more complex relationships over a wide variety of commercial actors.

To examine this broader range of states, my study borrows the principal-agent concept from economics. Central policymakers (the principals) often rely upon commercial entities (their agents) to implement economic statecraft. The process of delegation fosters unequal information levels and uncertain chains of authority, forcing political leaders to devise a set of incentives and constraints to shape agents’ behavior. The principal-agent framework highlights these delegation strategies and helps compare their relative effectiveness. It can help explain why even wealthy, powerful states may find themselves unable to extract compliance from economically dependent countries. Put simply, it helps bring domestic politics back into the study of economic statecraft.

As the Chinese state has grown larger, wealthier, and more powerful, it has come to rely upon a complex array of principals (bureaucratic agencies and regional authorities) to oversee the numerous agents (state-owned and private enterprises) implementing China’s economic statecraft. My project investigates two core hypotheses: (a) as China’s economic engagement with a country expands, so does the severity of this principal-agent dilemma; (b) a more severe principal-agent dilemma undermines the effectiveness of China’s economic statecraft. I test these hypotheses by comparing China’s economic statecraft with North Korea, Myanmar and Kazakhstan.

quote As the Chinese state has grown larger, wealthier, and more powerful, it has come to rely upon a complex array of principals (bureaucratic agencies and regional authorities) to oversee the numerous agents (state-owned and private enterprises) implementing China’s economic statecraft.

One evening, I met one of the Chinese managers of the road construction project while out for a stroll. We started talking, and he explained that the company had originally hired local Lao workers, following regulations from China’s Foreign Ministry, but soon found their working (and drinking) habits difficult to accept. The result: the company now sub-contracts with a Yunnan labor company, bringing in its entire workforce from across the border. Informal markets serving these Chinese workers have sprung up alongside the workers’ dorms. The Mo Han border crossing is busier than ever.

Escaping the Black Box

Too often, our views of Chinese foreign policy are shaped in Beijing-or even worse, by what we read in English-language newspapers or see on CNN. The result is a vast oversimplification of the Chinese state. While students of Chinese domestic politics are attentive to China's diversity, those of us who study international affairs too often 'black-box' the internal workings of the Chinese government. Easy references to decades-old formulas of China's fragmented bureaucracy are lazy and inadequate. To better understand how dynamic social and economic changes are transforming the institutions and processes that underpin China's external affairs, we need to get out of our comfort zones, to read and travel more widely. To understand how the domestic and foreign interact in China today, we need to explore the places where they meet. Mo Han is a good place to start.